Tax Tip: Charitable Contributions

Americans are some of the most generous and charitable people in the world. According to a report by the Giving USA Foundation, Americans gave over $300 billion in 2008. Your primary motivation for giving to a charity should not be saving taxes, but if you are going to give, you might as well reap whatever tax benefits are available.

Like many areas of tax law, a seemingly simple subject can become complex rather quickly. There is not enough room to cover all of the rules regarding charitable contributions in this short article, but I’ll hit some of the highlights you should be aware of when it comes to claiming a charitable deduction.

The first requirement is to make sure that the recipient is a qualified charity. You can give money to any person, group or organization you want, but it may not qualify as a tax deduction. Click here to search the IRS list of officially recognized charities. Gifts to individuals are not charitable contributions. You may want to help someone recover from a natural disaster or medical condition, but your gift isn’t tax deductible. You can’t circumvent this rule by giving money to a charity that is specifically designated to an individual.

Be advised that there are limitations on the amount of charitable deductions you can claim in any one tax year. The limitations are 20%, 30% and 50% of your adjusted gross income. The percentage limitation is determined based upon the property you are giving and the nature of the charity. Any unused contributions can be carried forward for 5 years.

You can receive a deduction for cash or property donated. Although your services may be invaluable, they aren’t tax deductible. One of the biggest issues of donating property is determining the fair market value. You may be able to get away with your best guesstimate when donating clothes to the Salvation Army or Goodwill, but it gets much more complicated for more valuable items that may not be easily valued.

You can receive a charitable deduction for out-of-pocket expenses you pay on behalf of a charity. It may be preferable for you to give cash and have the charity reimburse you, but this may not always be feasible. In any event, you must be able to demonstrate that the expenses were incurred for a charitable purpose and not your personal benefit. Travel expenses can qualify, but it can’t be a clever way for you to deduct your vacation expenses.

While you may be an honest and trustworthy person, the IRS can require you to substantiate your charitable contributions. Your word may be good, but it won’t work for cash donations. You either need to have a receipt from the charity or a copy of a canceled check. Most public charities will provide you with a statement no matter how much you give, and they are required to provide you with a receipt if you give over $250 in any one gift. The charity must also indicate if you received any substantial benefits for your gift. You may give $1,000 to your alma mater, but if you receive sporting event tickets worth $200, you can only deduct $800.

These are just a few of the requirements for deducting charitable contributions. Consult a tax advisor if you have questions about your particular situation. Savings taxes will probably not motivate you to make a contribution, but it can make it less expensive or allow you to give more. Either way, don’t overlook the tax savings that can be derived from a properly documented charitable contribution.